Incentive Trusts

11/09/2016

The wealthy have always struggled with how to incentivize their children to work hard for themselves and not just rely on family wealth and an inheritance.

One common concern among wealthy people is that leaving their wealth to their children may cause them harm. Many fear their children will stop working for themselves and just spend their parents' money.

These trusts only give money to beneficiaries when certain benchmarks are met, such as getting a college degree and getting a job with trust payments tied to salary. How well these incentive trusts work, however, is up for debate.

Oftentimes, they have the unintended consequence of punishing children for doing things their parents would actually approve. For example, by giving a child more money from the trust based on how much they earn might discourage them from taking an easy or part-time job, but the child would also be discouraged from taking a lower paying public service job.

Incentive trusts can be written in such a way that heirs are encouraged to do appropriate things, but they need to be flexible.

It can be a good idea to give the trustee some discretion to make trust disbursements in accordance with conduct the trustee thinks the parents would have approved.

12/22/2015

Incentive trusts are a popular way for people to encourage good behavior from their heirs. However, incentive trusts have limitations and you should be aware of them.

Everyone would like to see his or her heirs do well for themselves. A real fear exists that if an heir is given a great sum of money, the heir will do little with his or her own life and just live off the money.

Instead, people want to see their heirs go to good schools, get into professions and have families.

One popular response to this is to create incentive trusts. In these trusts beneficiaries receive distributions when they behave in a certain way or accomplish something, such as getting a college degree or getting a job.

The Trusts Are Too Inflexible – Sometimes things in the trust that seem like a good incentive generally do not work well for individual beneficiaries. For example, a trust might distribute money to a beneficiary upon receiving a college degree, but what if the beneficiary enters a profession that does not require a degree, such as the military, being a professional athlete, or being the next Bill Gates and founding a successful tech startup. If the trust language is too rigid, the trustee will not be able to distribute assets to these beneficiaries even if the person who created the trust would have wanted to.

The Trusts Are Too Vague – On the other end of the spectrum some incentive trusts are too vague. For example a trust that distributes money to a beneficiary when the beneficiary enters a respectable profession or gets a good job might require the trustee to make difficult judgment calls about a good job or respectable profession.

If you are considering setting up an incentive trust, it is important that you work closely with your estate planning attorney to create the trust in a way that is neither too inflexible nor too vague. Please schedule a consultation if you would like to discuss how a trust could work in your plans.

11/09/2015

One of the most difficult issues in estate planning is what to do about heirs who may need something like a parent's guiding hand long after they become adults. A child or grandchild may have a mental illness, a problem with substance abuse, or chronic trouble holding a job. Helping such a person by giving them money may in fact be harmful, by enabling bad or self-destructive behavior. One possible solution for such dilemmas is what's known as an incentive trust. This gives the trustee power to enforce provisions that encourage desired behaviors – or penalize the heir for failure to meet a certain standard.

Attempting to control too many aspects of an heir's life can be counterproductive: it's called trying to "control from the grave," or making an inheritance conditional. Examples of "incentives" include completing a certain degree or entering a certain line of work that may not be in line with an adult's actual talents or aspirations.

Nonetheless, where a clear pattern of negative actions exists, the right incentives can encourage an heir to make better life choices.

It's important to be realistic. The promise of inherited money may not be enough to overcome a pattern of severe substance abuse, so the threat of giving the inheritance to charity if specified incentives aren't met might be needed.

It may be a good idea to attach age restrictions.

If you have a kid who is irresponsible with money, a trust might be structured so that s/he will not have access to the estate's principal until a certain age. Some trusts set up staggered distributions, at specified ages, to keep them from burning through their inheritance right away. Another way to encourage a responsible lifestyle is to distribute trust funds on a matching basis. That might be dollar for dollar, based on what the beneficiary earns on his or her own. This is known as a "work ethic" clause.

Another sort of incentive clause could specify that the trustee wouldn't distribute any money until the heir showed an ability to handle the funds. For someone with an abuse problem, this could be enforced by requiring the beneficiary submit to random drug testing. Failure to comply could result in the assets being distributed to alternate beneficiaries, like charities.

Instead of just disinheriting a child or grandchild, an incentive trust can work as an escape clause. It might just help to get someone who's struggling to turn his or her life around.

01/06/2015

Wills can tell a lot about what people value. Looking through old wills can show how values might have changed over the years. The UK has recently aided that effort by making its archived wills available electronically dating back to 1858.

We often hear about the estates of recently deceased celebrities. Anyone can read the newspaper or search Google to find out the details of Michael Jackson's estate. However, the estates of historic famous people are more difficult to find. It often requires going to the library and pouring over history books.

The database includes many famous names, such as Winston Churchill and Charles Dickens. This is an interesting project and well worth a look for anyone who is interested in the lives and deaths of historic figures.

Closer to home, in the United States, something like this would need to be done on the state level.

One important message for modern estate planning is that wills are public.

When filed with a probate court, wills become available for the public to access. While it is not as easy to access wills in the United States as it is in the United Kingdom, it can still be done.

01/05/2015

Sarah Long was found dead in her home last July. While police are still investigating the circumstances of her death, the battle over her estate is heating up.

Sarah Long was reported missing last July and found dead in her home of gunshot wounds. Initially, her death was ruled to be a suicide. However, inconsistent evidence at the scene later caused police to open up a homicide investigation. The police still do not know what happened to Ms. Long.

Long had previously made a will that left everything to her boyfriend. She also had an estranged husband and, under South Carolina law, the husband should be entitled to 15% of her estate regardless of what her will states. (In Florida, the amount would be 30%.)

The husband and the boyfriend have been fighting over the estate in probate court. To make interesting matters more interesting, Long's family has also intervened.

There are allegations that Long made the will giving everything to her boyfriend under duress and that her husband abused her.

The latest development? The boyfriend and the husband have reached an agreement to which Long's family objects. If it turns out that Long was murdered, then the identity of the killer may also play a role in who gets the estate.

Hoskins' will is somewhat refreshing. Recent celebrity estate cases have often been fairly messy with serious estate planning mistakes. Hoskins, however, did what many ordinary people choose to do, he left everything to his spouse.

If a mistake was made here, it is that we know what Hoskins chose to do with his estate. By using a will, the details of his estate were made public. If he had used a trust, it is more likely that his estate and his wife's privacy would have remained free from public scrutiny.

That is something that everyone should keep in mind. Wills are made public. If you do not want everyone knowing the details of your estate, then you need something besides a will.

01/01/2015

For many people, dogs are more than just best friends. They are a valued member of the family. However, pets, unlike other family members, are legally property. This raises the question whether you can direct that your pets be put to sleep after you pass away.

An Indiana woman named Connie Ley passed away in November. In her will, she made provisions for her pet German shepherd. The first provision was fairly standard. Ley directed that one of her friends should look after the dog. However, Ley also went on to direct that the dog should be put to sleep, cremated and that its ashes should be buried with Ley.

In this particular case, the dog is currently in a shelter waiting for a court to determine whether Ley's wishes will be followed.

This is not the first time that the issue has come up. In some other cases courts have decided to put pets down as directed in the wills of the owners. The reason for this is that as much as we often think of our pets as part of the family, the law treats them as personal property.

Animal cruelty laws aside, we are free to do with our pets as we please, including directing what should happen to them after we pass away.

The lesson here? If you want to determine what will happen to your pets after you pass away, then you should make that a part of your will. I would be happy to assist in crafting a plan that is fair to you and your furry friends.